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Herbalife: No remedy for investors
Last month, activist investor Bill Ackman of Pershing Square Capital Management made a very public call against herbal supplements seller Herbalife (NYSE: HLF ) , when he made a three-hour presentation of his "short" thesis for the stock at the annual Ira Sohn Investing Conference. Ackman pulled no punches, calling Herbalife a "pyramid scheme" and claiming that 90% of the profits Herbalife distributors earn derive from recruiting new distributors rather than from selling the company's products. The stock lost roughly a third of its value over the course of the next three days. Pershing Square is short more than 20 million shares of the stock.
Earlier today, it emerged that another well-known and very successful investor, Dan Loeb of Third Point Capital, has taken an 8% long position in the stock. In a letter to his investors, Loeb refutes the notion that Herbalife is a pyramid scheme, instead calling it a "classic compounder." He thinks the stock could go to $68. Third Point made one of the most lucrative contrarian bets in the hedge fund industry last year, snapping up Greek government bonds at the beginning of the year and subsequently roughly doubling their money to earn a $500 million profit.
In high-profile situations, individual investors may be tempted to piggyback on the investment of a star fund manager. However, in a case in which there is an obvious disagreement between two talented and thoughtful investors, it may be useful to invoke the observation of a third highly successful value investor -- the dean of the strategy -- Berkshire Hathaway (NYSE: BRK-B ) CEO Warren Buffett, who told his shareholders at the 2006 annual meeting: "Charlie [Munger, Buffett's partner] says we have three boxes: In, Out, and Too Hard."
Ackman's team spent 18 months looking at Herbalife, bringing two law firms and forensic accountants onto the project. Dan Loeb isn't known for making investments on a whim, either. For non-professional investors, this one clearly belongs in the "Too Hard" box.
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